While inflation has cooled across many areas of the U.S. economy, healthcare-related expenses continue to rise at an alarming rate. In fact, the cost of employer-sponsored health insurance has risen by 7% for the second year in a row, resulting in the highest increase in more than a decade. And the average family’s premium has increased by more than $3,000 per year, reaching approximately $25,500 per family.1
Retirees are facing similar increases, as the average annual cost of retiree healthcare increased by approximately 5% from 2023 to 2024.2 With healthcare costs already one of the largest expenses faced by retirees, you may be wondering how best to prepare for the ever-increasing cost of medical care in retirement. The following tips can help.
#1 – Contribute to a health savings account (HSA).
If you’re still working and you participate in a high-deductible health plan (HDHP), you may be eligible to contribute to an HSA, which can be a great way to save for retirement medical expenses. HSAs offer three distinct tax advantages:
- Because contributions are made with pre-tax dollars, they reduce an individual’s taxable income.
- Invested HSA funds grow tax-free in the account.
- When used to pay for eligible medical expenses, HSA withdrawals are tax-free.
In addition, HSA contributions made via payroll deduction aren’t subject to Social Security and Medicare taxes, and, unlike with 401k contributions, there are no required minimum distributions from the account.
#2 – Carefully consider your Medicare options.
Once you reach age 65, it’s important to take time to consider your Medicare options and how your decisions may impact your overall healthcare expenses in retirement. Begin by gaining an understanding of Medicare’s four separate plans and what expenses are covered by each.
- Part A – Covers costs related to inpatient hospital visits, skilled nursing facilities, hospice and palliative care, and home healthcare.
- Part B – Covers outpatient care, medical equipment and medically necessary doctors’ services. Some preventative care is also covered by Part B, such as X-rays, mental health services and laboratory tests. You must pay a monthly premium for this coverage, and that premium is based on your income.
- Part C – Part C refers to Medicare Advantage Plans, which are plans provided by private health insurance companies that have contracts with the U.S. government. Some Medicare Advantage Plans offer additional coverage for vision, hearing and dental services, and many also offer enhanced prescription drug coverage.
- Part D – Part D refers to Medicare’s prescription drug coverage, including shots and vaccines. This is an optional plan available for an additional fee.
If you are still employed past the age of 65 and covered by your employer’s health insurance plan, you can delay enrolling in Medicare without being subject to a late enrollment penalty. This ability provides you with an extended opportunity to contribute to your HSA, because once you enroll in Medicare, you’re no longer eligible to contribute to an HSA.
It’s also important to consider how your income may impact the amount you pay for Medicare coverage. For example, in 2024, the standard Part B monthly premium is $174.70 for individuals earning $103,000 or less ($206,000 or less for couples filing jointly.) However, those premiums continue to increase alongside your income, as noted in the table below.
If you didn’t pay enough Medicare taxes throughout your working years, you may need to pay up to $505 each month in Part A premiums. In addition, monthly premiums for optional Medicare Part D prescription drug coverage are also based on your income.
#3 – Consider long-term care (LTC) insurance.
Another important healthcare expense to plan for in retirement is the cost of long-term care. A recent study estimated that 56% of Americans turning 65 today will need some type of long-term care in their lifetime, at an average cost of $120,900 as measured in today’s dollars.3
It’s easy to see how long-term care expenses can quickly add up, given that it costs an average of $6,292 per month for a home health aide, $5,350 per month for an assisted living facility and $9,733 per month for a private room in a nursing home facility.4
Given these statistics, you may be tempted to rush out and purchase a LTC insurance policy; however, the cost of the policy may actually outweigh the benefits, especially if you’re fortunate enough to not need long-term care. That’s why, for some individuals, it makes more sense to invest in a diversified investment portfolio, that’s meant to continue growing over time, rather than purchasing an expensive LTC insurance policy you may end up not needing.
